How to beat the markets (at their own game) – Top 10 helpful tips to build your Portfolio

How to beat the markets (at their own game) - Top 10 helpful tips to build your Portfolio

Matthew Brown

Outperforming the stock market is the dream of every investor. For those investors who fail to make a profit from the markets, they think there is some magic formula or ‘insider information’ that others have. But reality is that common sense, a well thought through plan and an understanding of the strategies you can use are the real key to beating the markets at their own game.

There’s many ways you can beat the markets. At times, luck might have a little to do with it, but using the “Hope & Pray” method of buy and hold and hoping for the best is certainly not the most effective method. To provide a thorough Investment Plan in the short scope of an article such as this is a little ambitious. Hence, through the following article I’m going to provide my top 10 helpful tips in building a portfolio that will beat the markets at their own game!

Tip #1 – Invest Globally

The modern world of investing has become extremely small due to the internet and online trading platforms. But you don’t need to invest in Chinese companies to have exposure to China. I use the US markets to invest not only in US stocks & options, but for exposure in commodities, indices, international markets, Exchange Traded Funds and Currencies.

Funding an account to invest/trade globally has never been cheaper. We use the Halifax Trader Work Station (TWS) which has extremely competitive brokerage rates, but also allows you to keep your funds in Australian dollars or US dollars. Therefore, helping to limit fluctuating currency Risks.

Tip #2 – Set goals and objectives

Before choosing stocks, you must first establish what your goal for investing is. For those clients that respond to me with “to make money!”, means they aren’t serious in their approach to investing. A simple goal might be “To outperform the markets – exceeding the S&P500 return by 5%” for example.

Your goals and objectives might change over time, especially as you have more capital to invest with. At the same time, it can be hard to establish what you can achieve without any experience. Hence the above suggestion of outperforming a leading index is a great starting point.

When you do have some experience under your belt, start to evaluate your performance results, and use your past experience to learn how to make better decisions. Continual evaluation is something you will do throughout your investing career. Otherwise, how would you know where you can improve and outperform the markets?

Tip #3 – Diversification, but not too much!

It’s true that a well diversified portfolio can help weather a financial storm, but becoming a specialist can also reap rewards. For the average investor, however, the key is to ensure you have exposure in different industries, of course, choosing industries that have a stronger potential for growth. Depending on size of portfolio, the average investor will look to maintain 8 to 10 positions across 5 or 6 different industries. A simple method is choosing the top performing stocks within a sector.

But if your goal is more ambitious than “beating the S&P500 by 5%” for example, then you may need to diversify into more speculative positions such as Small Cap or Speculative stocks. Hence the importance of first establishing your Goals and Objectives.

Tip #4 – Invest without emotion

Easier said than done? As a professional, I invest with client funds without emotion. For the average Mum & Dad taking on the markets can feel quite daunting. Bottom line is, that money = emotion. It’s hard to come by, but easy to go.

A Trading Plan (see below) is the pivotal key to investing without emotion. It outlines what you need to do if the markets are rising, falling or going sideways, providing guidance in what action to take.

In addition to this, think in terms of percentage rather than dollar figures. As we are emotionally attached to money, analysing gains and losses in percentage terms will have far less an impact on your emotional being.

It may also be worthwhile doing a course on understanding the mindset of a trader. At Australian Investment Education (AIE), the Mindset Mastery course is ideal for those investors/traders who already have some experience in the markets.

Tip #5 – Trading Plan

This point has been hounded to death for decades. But yet I still see investors approaching the markets without a clear and precise action plan. It’s criminal!

Experience will help in establishing a trading plan that suits you best. But the professional investor/trader knows that continual evaluation and adjusts to the trading plan are part and parcel of successfully investing in the markets.

With your goals and objectives in mind, you need to establish your Entry rules, Exit rules, and Money Management approach. All too often I find investors focusing on trying to choose the best stock to invest in, and paying very little attention to the Exit rules component of their trading plan. There’s no point having the best entry criteria if you can’t manage your losses.

Tip #6 – Understand and use Options

After more than 14 years experience in the markets as a professional analyst, I would not approach investing in the markets without utilizing Options strategies.

Options provide me with the ability to Protect/Hedge my investment capital. They provide an additional income (selling options for premium return), and allow me to make a profit if the markets are going up, down or sideways.

The field of options might be one of the more intricate to learn and understand, and are not fully understood by many. However, even having a simple understanding of Options to enquire with an Options broker will more than help you in beating the markets at their own game.

Tip #7 – Don’t watch daily price movements

If your Trading Plan is to invest for the medium to long-term, then don’t sit and watch the markets all day long. Many rash decisions have been made in the past because of intra-day price fluctuations that have scared investors into taking action.

Patience is a big key to investing successfully, especially as we now have the ability to buy and sell at our finger tips.

As an investor, you want to establish when you will check prices and evaluate your portfolio. In most cases, this might be at the end of the week or at the end of each trading day.

Tip #8 – Don’t try and learn it all yourself. Use the services of a professional

I heard a saying once: “The stock market is the hardest way to make an easy dollar”. It’s not that the concept of buying and selling is hard, but that the intricacies of market dynamics, how you react as an individual (emotions) and understanding what you can do with strategies can take time to learn.

Adopting the services of a skilled professional can be far more cost effective than attempting to learn everything for yourself. If you lost $10,000 to the stock market for silly mistakes but could have spent $2,000 educating yourself on the dynamics of the markets, would it be worthwhile?

How about using the services of a professional while you are learning? That way, you have a better probability of protecting your capital. At Australian Investment Education (AIE), we have numerous courses across various fields of study in relation to Stocks, Options, Commodities and Futures.

Tip #9 – Know the strategies you can adopt in different market conditions

If I were to say you can profit from a stock as the share price falls, most people would tell me I was doing something illegal. And yet, this is a function that has been available for traders since markets were first regulated.

As a professional, I know that in the future the markets will rise, they will fall and they will consolidate sideways. We have had market crashes in the past, and we will have them in the future, just like we will eventually see a Booming market again in the future. Knowing what strategy/s to adopt during different market conditions is one of the keys to becoming a successful investor.

To do this, I utilize both stock and options strategies. I will trade globally, and utilize equities, currencies, commodities and Exchange Traded Funds to achieve my goal of diversifying and managing the Risk of changing markets.

Tip #10 – Reward yourself

Finally, what is the point of investing in the markets unless you take the time to reward yourself. Part of my Goals and Objectives is to create positive reinforcement. That doesn’t just mean paying myself when I reach my target of returns. A big key to rewarding for positive behaviour is to reward myself when I have followed my trading plan successfully over a period of time.

In the end, successful investing in the markets can be dictated by extraneous events and global economic performance. But by knowing that you can profit in the markets no matter whether they are rising, falling or stagnating means you can start to establish a plan of what action to take. I approach the markets from an unemotional perspective as it is purely a means to an end – this skill takes time to build and requires, amongst other things, a mastering of your own Trader Mindset.

Practice, analysis of results and knowledge all help towards achieving the goals I set for myself. One great thing about trading is that it is simply process. Processes can be modeled and its always possible to fast-track. To help you accelerate your growth in this critical stage of your development as a trader, click here.

Since 1998, Matthew has been involved in the Financial Services industry providing stock, option and CFD advisory services, trading advice, funds management and education services. Matt is an Authorised Representative of Halifax Investment Services, providing analysis and recommendations for trading Covered Calls in the US markets and using Exchange Traded Funds (ETFs) ...

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